2003 (8) TMI 208 - AT - Income Tax

Taxability of the amount received by the assessee on retirement from the firm as long-term capital gains - HELD THAT - From a perusal of the aforesaid observations of the Hon ble Bombay High Court in the case of N.A. Mody vs. CIT 1985 (10) TMI 52 - BOMBAY HIGH COURT , it is quite evident that the factual position involved in the case of Mohanbhai Pamabhai 1987 (2) TMI 59 - SC ORDER was found to be distinguishable by their Lordships from the facts in the case of N.A. Mody inasmuch as the mode of retirement adopted in the case of Mohanbhai Pamabhai was different in the sense that the amount of retiring partner s share in the net partnership assets after deduction of liabilities and prior charges was determined on taking accounts and as further observed in para No. 19 of the order, although there was a document in the form of minutes under which the partner retired, the same contained no assignment of his interest to the continuing partner. The Hon ble Bombay High Court thus laid great emphasis on the particular mode employed to effect and bring about the retirement of the assessee from the partnership and having regard to the fact that lumpsum consideration was received by the retiring partner in the case of N.A. Mody as consideration for assignment of his share in a firm to the retiring partners, came to the conclusion that there was a transfer within the meaning of s. 2(47) giving rise to capital gain. We also do not find merits in his contention that when a partner retires from the firm, it is a case of realization of his pre-existing rights and not the case of extinguishments or relinquishment of his rights within the meaning of s. 2(47), since as already discussed, observations to this effect were made by the Courts in the different context and as held by the Hon ble Bombay High Court, the same cannot be applied or read as a proposition of law in the context of taxability of amount received on retirement as long-term capital gain. As a matter of fact, it appears from the decisions relied upon by the learned counsel for the assessee that neither the Hon ble Supreme Court nor the other High Courts have disapproved the proposition laid down by the Hon ble Bombay High Court having regard to the particular mode of retirement. In the present case, however, heavy reliance has been placed by the Revenue on the said decision and having come to the conclusion that the said decision of Hon ble jurisdictional High Court is squarely applicable to the facts of the case, we are bound to follow the same. Moreover, it is also observed a Special Bench of the Tribunal was constituted at Bangalore to decide a similar issue and in it s decision rendered in the case Mrs. Arathi Shenoy Ors. vs. Jt. CIT 2000 (7) TMI 207 - ITAT BANGALORE , it was held by the Tribunal that interest in a firm is an asset as any other asset as recognized by the Act that defined a capital asset to include extinguishment of interest and the partners having surrendered/extinguished their rights in such asset on retirement from the firm, there was a transfer within the meaning of s. 2(47) giving (rise) to capital gain exigible to tax. Explaining further, the Tribunal observed that in situation where a partner receives for giving up his rights and interest in the firm at a price that is equated with reference to the market value of the assets of the firm, his rights and interest have been valued at the market price and when this price exceeds the cost, s. 45 comes into operation to treat the difference between the market price and the cost being gains on account of transfer of capital asset leading to levy of tax on such capital gains. It was, therefore, held by the Tribunal in the said case that the outgoing partners of the firm having surrendered their rights and interest in the firm in consideration of the amount paid to them by the other partners who took over the business in an auction in accordance with the terms of the partnership deed, there was a transfer of capital asset and the resultant capital gain was liable to tax as long-term capital gain in the hands of each partner. In the result, the appeal of the assessee stands dismissed.

Issues Involved:
1. Taxability of the amount received by the assessee on retirement from the firm as long-term capital gains.
2. Applicability of Section 45(4) of the Income Tax Act.
3. Interpretation of the term "transfer" under Section 2(47) of the Income Tax Act.
4. Reliance on judicial precedents and their applicability to the present case.

Detailed Analysis:

1. Taxability of the Amount Received by the Assessee on Retirement from the Firm as Long-Term Capital Gains:

The assessee filed a return of income declaring Rs. 26,813 and mentioned receiving Rs. 34,43,700 on retirement from the firm M/s Mehta & Kakade Associates. The AO issued a notice under Section 148 and during reassessment, contended that the retirement did not result in the transfer of any asset, thus the amount was not liable to capital gains tax. The AO, however, held that the amount was liable to capital gains tax, citing the definition of "transfer" under Section 2(47) and the decision of the Bombay High Court in CIT vs. Tribhuvandas G. Patel.

2. Applicability of Section 45(4) of the Income Tax Act:

The AO argued that Section 45(4) did not apply as no capital asset was distributed to the retiring partners, and only the money value of the retiring partner's share was given. The AO emphasized that Section 45(4) fastens liability for capital gain tax on the firm and not on any partner when the firm does not stand dissolved and capital assets are retained by it. The CIT(A) upheld this view, stating that the assessee relinquished all rights in the firm's assets, making the amount received liable to capital gains tax.

3. Interpretation of the Term "Transfer" Under Section 2(47) of the Income Tax Act:

The AO and CIT(A) relied on the definition of "transfer" under Section 2(47), which includes relinquishment or extinguishment of rights in an asset. The Bombay High Court in N.A. Mody vs. CIT held that a lump sum consideration received on assignment of a partner's share in a firm on retirement amounts to a transfer, thus liable to capital gains tax. The Tribunal noted that the mode of retirement and the method of settling accounts were crucial in determining whether a transfer occurred.

4. Reliance on Judicial Precedents and Their Applicability to the Present Case:

The assessee relied on various decisions, including CIT vs. Mohanbhai Pamabhai and Sunil Sidharthbhai vs. CIT, arguing that no transfer occurs on retirement from a firm. The Tribunal, however, noted that the decision of the Bombay High Court in N.A. Mody was distinguishable and applicable, as it specifically dealt with the mode of retirement involving a lump sum consideration and assignment of interest. The Tribunal also discussed the decisions of the Andhra Pradesh High Court in L. Raghukumar and the Supreme Court in McDowell & Co. Ltd. vs. CTO, concluding that the mode of retirement in the present case involved a transfer, making the amount received liable to capital gains tax.

Conclusion:

The Tribunal upheld the CIT(A)'s decision, confirming that the amount received by the assessee on retirement from the firm was liable to capital gains tax. The Tribunal emphasized the importance of the mode of retirement and the specific assignment of interest in determining the taxability under Section 2(47) and Section 45(4) of the Income Tax Act. The appeal of the assessee was dismissed.

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